Let’ explore some of the factors that affect the price movements of a cryptocurrency. We have identified the main factors which affect the cryptocurrency price (but there are many more other)
- Supply & Demand
- Market Sentiment
- Mining Difficulty
Supply & Demand
Supply and demand is a fundamental factor that affects the price of a cryptocurrency (and the price of any type of market). Bitcoin is the most well-known, and therefore, the most sought-after cryptocurrency. With a circulating supply of 16.7 million coins, the number of bitcoins available is quite low when compared to altcoins.
This low supply, when weighed against the staggering demand Bitcoin has seen in the past few months, is believed, by some, to be the reason for Bitcoin’s surge in price.
Utility = the usefulness of a cryptocurrency. The more useful a cryptocurrency is, the more likely it is to be perceived as valuable, and therefore, the more likely it is to be bought.
Let’s take Ethereum as an example! People believe it is useful because of the platform that it provides in allowing people to build decentralized applications on top of. This novel use of blockchain technology as a sort of app store, as opposed to a medium of exchange, has been perceived by some to be very useful. And so, Ethereum can be said to have high utility and therefore be seen as valuable.
As a cryptocurrency trader, it is likely that you will switch between multiple positions at a high frequency. Therefore, it becomes key that any position you take is well researched and has a positive market sentiment surrounding it.
Read more on Where Is the Cryptocurrency Industry Headed in 2019?
It is important to research any project you intend investing and to read recent articles on that cryptocurrency. If you invest in a cryptocurrency that has had no real coverage, it is likely that your position will stagnate, or even worse, to decline in value.
Getting a clear view of the sentiment surrounding a cryptocurrency allows you to filter the useless cryptocurrencies and focus on active projects capable of growth.
Mining difficulty = a measure of how hard it is to be the next person that gets to add a block to the blockchain, and receive the reward for doing so.
A lower mining difficulty indicates that a cryptocurrency is easy to mine; this results in an increase in the rate of supply, and therefore, downward pressure on its price.
Conversely, a higher mining difficulty suggests that a cryptocurrency is harder to mine. This results in supply growing at a slower rate, therefore resulting in upward pressure on the price.